NO FRONTING, NO PROBLEM

One reason why history is unlikely to repeat itself is the absence of the “fronting model” popular back in the last 1990s. That is one big distinguishing factor between now and then, market participants say.

Wayne Carter, EVP at Crump Professional Programs, recalls that “back then, in many situations, the risk bearer was the reinsurer. Occasionally, you would have the MGA take a piece of the action. But often, the insurance company didn't take any risk, which is why they were called fronting arrangements.”

When reinsurers stopped paying claims, it was “a house of cards,” recalls Andrew Burger, VP of Gill & Roeser. “The marketplace was not terribly sophisticated,” he adds, referring to a lack of actuarial analytics and technology to support underwriting decisions—and describing an environment where program partnerships between reinsurance intermediaries, carriers and MGAs sprung from “old school ties” rather than specialized expertise.

That contrasts sharply with the current environment, where “companies are just a lot smarter and the technology more advanced,” says Steve Dresner, head of the specialty insurance business unit of Endurance. “All of our key competitors are taking a lot more risk up front and managing the programs better than a reinsurance company could.”

While Endurance has both insurance and reinsurance operations, “in the program space, we primarily play on the insurance side,” he says. “That's where you're closer to the market [and] you can drive underwriting control and profitability.”

“Today, there's not as much reinsurance,” says Bob Kimmel, EVP/program specialty practice leader at Guy Carpenter, who authors the firm's annual survey of program-business carriers. Because carriers are keeping the business net, he believes they do more due diligence before signing on to programs and more closely monitor those on the books. Six years ago, half the market was doing only one underwriting audit each year. Now the majority do at least two, he says.

THE MORE THINGS CHANGE…

While the carnage likely will be more contained this time around, casualties will occur.

“You can still find a way to build a bad book of program business,” says George Lagos, principal of GL Insurance Partners. “If you look at the quality of books of various companies, they're not identical,” he adds, noting that while some carriers have seasoned books and longstanding relationships with PAs, others are breaking into the segment. “Inevitably when you're in that position, you don't attract the big, stable programs. You end up working with those on the other end of the [spectrum],” he says.

Still, Lagos believes the industry will see fewer “spectacular crashes and burns” during the next turn. The absence of fronting won't solve all problems, “but it certainly solves some bigger ones,” he says. “That can be a very quick way to get into trouble—when there's no alignment of interests, and people are doing things that are strictly driven on volume.”

But Bob Abramson, managing director of Bliss & Glennon, disagrees. “The market won't change until the Legions of the world go broke,” he says, referring to a renowned past insolvency. “I've been in this business 34 years and have never seen the market turn without carriers going down.”

Another notorious feature of the past cycles—“naïve capital”—is absent in this one, says Crump's Carter. But there is still too much capital and aggressive competition. Even though there are more people with expertise in the business today, insurers are “actually forced, probably against their better judgment, to drive premium [volume] into their operations to satisfy commitments [to investors].”

The competitive dynamic is different, but “the end result is exactly the same [as during the last turn]—too many dollars chasing too few accounts,” says Carter.

That means carrier exits “will have to happen” when losses emerge on underpriced business. “Eventually they're either going to pull the plug or shut their doors because they're upside down with respect to results,” he says. “We're seeing too much irrational behavior from certain markets. And it's classic. It always comes full circle.”

RETRENCHMENT VS. RETREAT

Are some carriers already starting to exit?

“I do see it. It's happened to me already this year,” says Gill & Roeser's Burger, who described carrier moves as “retrenchments” rather than wholesale exits.

Only RenaissanceRe has completely exited, announcing the sale of its program business operations to QBE in November 2010.

But Burger says insurers are moving off unprofitable programs quickly. Before, they might have given a program manager a year to fix things. Then it was two quarters. Now, they're withdrawing in 90 days.

“They're raising the bar regarding information and return requirements, and that's starting to be more ubiquitous,” he says.

In contrast, Kimmel of Guy Carpenter says carriers are “hungry for the business” even though they recognize that underwriting profits are disappearing. Two years ago, only 8 percent of program carriers pegged the program market combined ratio above 100. This year 30 percent put it there, he says.

Kimmel also reports, however, that as loss ratios climb, carriers are working the expense side of the combined ratio. They expect PAs to take on more responsibilities than in the past—for policy issuance, loss control, premium audit, claims—and to do so for the same commissions, he says.